XNAS:COHR Coherent Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________________________
FORM 10-Q
 ___________________________________________________
 
(Mark One)
S
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012
or
£
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission File Number: 001-33962 
COHERENT, INC.
Delaware
 
94-1622541
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000 
___________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer S
 
Accelerated filer £
 
 
 
Non-accelerated filer £
 
Smaller reporting company £
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No S
 
The number of shares outstanding of registrant’s common stock, par value $.01 per share, on July 27, 2012 was 23,683,223.




COHERENT, INC.

INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends,” “Our Strategy,” discussions regarding our bookings and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Future Trends,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated event.


3


PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data) 

 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
Net sales
$
196,383

 
$
210,882

 
$
580,434

 
$
594,873

 
Cost of sales
116,138

 
120,720

 
342,182

 
333,548

 
Gross profit
80,245

 
90,162

 
238,252

 
261,325

 
Operating expenses:
 

 
 

 
 
 
 
 
Research and development
19,306

 
21,738

 
58,408

 
61,514

 
Selling, general and administrative
32,894

 
37,983

 
102,902

 
113,040

 
Amortization of intangible assets
1,723

 
1,851

 
4,970

 
6,203

 
Total operating expenses
53,923

 
61,572

 
166,280

 
180,757

 
Income from operations
26,322

 
28,590

 
71,972

 
80,568

 
Other income (expense):
 

 
 
 
 
 
 
 
Interest and dividend income
52

 
258

 
283

 
602

 
Interest expense
(71
)
 
(54
)
 
(78
)
 
(86
)
 
Other—net
(1,918
)
 
562

 
288

 
11,329

 
Total other income (expense), net
(1,937
)
 
766

 
493

 
11,845

 
Income before income taxes
24,385

 
29,356

 
72,465

 
92,413

 
Provision for income taxes
7,177

 
10,334

 
22,051

 
30,555

 
Net income
$
17,208

 
$
19,022

 
$
50,414

 
$
61,858

 
 
 
 
 
 
 
 
 
 
Net income per share:
 

 
 

 
 
 
 
 
Basic
$
0.73

 
$
0.76

 
$
2.14

 
$
2.47

 
Diluted
$
0.72

 
$
0.74

 
$
2.10

 
$
2.42

 
 
 
 
 
 
 
 
 
 
Shares used in computation:
 

 
 

 
 
 
 
 
Basic
23,633

 
25,066

 
23,538

 
25,000

 
Diluted
24,054

 
25,587

 
24,004

 
25,562

 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4



COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands) 

 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
 
Net income
$
17,208

 
$
19,022

 
$
50,414

 
$
61,858

 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Translation adjustment
(11,796
)
 
11,390

 
(18,587
)
 
11,950

 
Changes in unrealized gains (losses) on available-for-sale securities, net of taxes
12

 
(18
)
 
(2
)
 
(2
)
 
Other comprehensive income (loss), net of tax
(11,784
)
 
11,372

 
(18,589
)
 
11,948

 
Comprehensive income
$
5,424

 
$
30,394

 
$
31,825

 
$
73,806

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

5


COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par data)
 
June 30,
2012
 
October 1,
2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
82,580

 
$
167,061

Short-term investments
127,024

 
53,142

Accounts receivable—net of allowances of $1,190 and $1,439, respectively
141,332

 
141,037

Inventories
160,095

 
152,385

Prepaid expenses and other assets
71,873

 
44,964

Deferred tax assets
19,887

 
22,057

Total current assets
602,791

 
580,646

Property and equipment, net
114,898

 
104,504

Goodwill
73,751

 
75,954

Intangible assets, net
13,076

 
17,980

Other assets
65,846

 
64,182

Total assets
$
870,362

 
$
843,266

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term obligations
$
17

 
$
15

Accounts payable
38,287

 
39,841

Income taxes payable
21,283

 
23,929

Other current liabilities
108,481

 
98,620

Total current liabilities
168,068

 
162,405

Long-term obligations
6

 
19

Other long-term liabilities
53,936

 
62,841

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 

Common stock, par value $.01 per share:
 

 
 

Authorized—500,000 shares
 

 
 

Outstanding—23,683 shares and 23,722 shares, respectively
236

 
236

Additional paid-in capital
128,776

 
130,250

Accumulated other comprehensive income
32,632

 
51,221

Retained earnings
486,708

 
436,294

Total stockholders’ equity
648,352

 
618,001

Total liabilities and stockholders’ equity
$
870,362

 
$
843,266


See Accompanying Notes to Condensed Consolidated Financial Statements.

6


COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Nine Months Ended
 
June 30,
2012
 
July 2,
2011
Cash flows from operating activities:
 

 
 

Net income
$
50,414

 
$
61,858

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation and amortization
17,179

 
14,853

Amortization of intangible assets
4,970

 
6,203

Deferred income taxes
(2,095
)
 
17,249

Tax benefit from employee stock options
4,091

 
296

Loss on disposal of property and equipment
572

 
239

Stock-based compensation
12,310

 
9,521

Excess tax benefit from stock-based compensation arrangements
(2,715
)
 
(4,368
)
Non-cash translation adjustment related to Finland dissolution

 
(6,511
)
Other non-cash (income) expense
140

 
(120
)
Changes in assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
(3,810
)
 
(27,572
)
Inventories
(11,721
)
 
(30,760
)
Prepaid expenses and other assets
(21,181
)
 
(23,376
)
Other assets
1,510

 
(4,105
)
Accounts payable
(1,100
)
 
4,830

Income taxes payable/receivable
(16,271
)
 
10,730

Other current liabilities
12,237

 
21,106

Other long-term liabilities
(819
)
 
4,161

Net cash provided by operating activities
43,711

 
54,234

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(30,613
)
 
(27,448
)
Proceeds from dispositions of property and equipment

 
338

Purchases of available-for-sale securities
(188,542
)
 
(172,719
)
Proceeds from sales and maturities of available-for-sale securities
114,776

 
122,542

Acquisition of businesses, net of cash acquired

 
(14,589
)
Other

 
20

Changes in restricted cash

 
625

Net cash used in investing activities
(104,379
)
 
(91,231
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Short-term borrowings
9,262

 
1,551

Repayments of short-term borrowings
(9,262
)
 
(1,551
)
Net change in capital lease obligations
(11
)
 
(15
)
Issuance of common stock under employee stock option and purchase plans
11,537

 
32,432

Repurchase of common stock
(24,999
)
 
(41,938
)
Net settlement of restricted common stock
(4,514
)
 
(3,279
)
Excess tax benefits from stock-based compensation arrangements
2,715

 
4,368

Net cash used in financing activities
(15,272
)
 
(8,432
)
Effect of exchange rate changes on cash and cash equivalents
(8,541
)
 
(270
)
Net decrease in cash and cash equivalents
(84,481
)
 
(45,699
)
Cash and cash equivalents, beginning of period
167,061

 
245,380

Cash and cash equivalents, end of period
$
82,580

 
$
199,681

Supplemental disclosure of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
71

 
$
57

Income taxes
$
45,422

 
$
16,206

Cash received during the period for:
 

 
 

Income taxes
$
11,055

 
$
5,585

 
 
 
 
Non-cash investing and financing activities:
 

 
 

Unpaid property and equipment
$
1,611

 
$
982


See Accompanying Notes to Condensed Consolidated Financial Statements.

7


COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the “Company,” “we,” “our,” “us” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended October 1, 2011. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year or any other interim periods presented therein. Our fiscal year ends on the Saturday closest to September 30 and our third fiscal quarters include 13 weeks of operations in each fiscal year presented. Fiscal years 2012 and 2011 each include 52 weeks.
 
2.    RECENT ACCOUNTING STANDARDS
 
Adoption of New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued additional guidance on fair value measurements that clarified the application of existing guidance and disclosure requirements, changed certain fair value measurement principles and required additional disclosures about fair value measurements. We adopted this standard on a prospective basis in the second quarter of fiscal 2012. The adoption of this accounting standard did not have an impact on our consolidated financial position, results of operations and cash flows.
In June 2011, the FASB issued a final standard requiring the presentation of net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The new standard eliminated the option previously elected by the Company to present items of other comprehensive income in the annual statement of changes in stockholders' equity. The new requirements did not change the components of comprehensive income recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Earnings per share computations do not change. We adopted this standard on a full retrospective basis, as required, in the second quarter of fiscal 2012. As this standard relates only to the presentation of other comprehensive income, the adoption of this accounting standard did not have an impact on our consolidated financial position, results of operations and cash flows.
In September 2011, the FASB amended existing guidance related to goodwill and other intangible assets by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. We adopted this authoritative guidance in the first quarter of fiscal 2012. We do not expect the implementation of this authoritative guidance to have a material impact on our consolidated financial position, results of operations and cash flows in connection with our impairment test, which we perform annually as of the the first day of the fourth quarter.
Recently Issued Accounting Pronouncement

In July 2012, the FASB amended existing guidance related to goodwill and other intangible assets by giving an entity testing an indefinite-lived intangible asset for impairment the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of an intangible asset is less than its carrying amount. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not impaired, the entity would not need to calculate the fair value of the asset. The guidance does not revise the requirement to test indefinite-lived intangible assets annually for impairment or to test these

8


assets for impairment between annual tests if there is a change in events or circumstances. This amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial position, results of operations and cash flows.

In December 2011, the FASB issued guidance which requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of setoff associated with the entity's recognized financial assets and liabilities, on the entity's financial position. The new disclosures will enable financial statement users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards ("IFRS"), which are subject to different offsetting models. The disclosures will be limited to financial instruments (and derivatives) subject to enforceable master netting arrangements or similar agreements. Similar agreements include derivative clearing agreements, global master repurchase agreements, and global master securities lending agreements. Financial instruments and transactions that will be subject to the disclosure requirements may include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The guidance is effective for us beginning in fiscal 2014. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial position, results of operations and cash flows.
3.     BUSINESS COMBINATIONS
  
On January 5, 2011, we acquired all of the assets and certain liabilities of Hypertronics Pte Ltd for approximately $14.5 million in cash. Hypertronics designs and manufactures laser-and vision-based tools for flat panel display, storage, semiconductor and solar applications at facilities in Singapore and Malaysia. Hypertronics was included in our Specialty Lasers and Systems segment.
 
Our allocation of the purchase price is as follows (in thousands):

Tangible assets
$
4,617

Goodwill
5,807

Intangible assets:


Existing technology
3,120

In-process R&D
570

Customer lists
1,880

Trade name
410

Non-compete agreements
60

Liabilities assumed
(1,965)

Total
$
14,499

 
The goodwill recognized from this acquisition resulted primarily from anticipated revenue growth and synergies of integrating Hypertronics scan vision technology and system capabilities with our laser technology and global sales, marketing, distribution and service network. The goodwill was included in our Specialty Lasers and Systems segment.

None of the goodwill from this purchase is deductible for tax purposes.
 
The identifiable intangible assets are being amortized over their respective useful lives of two to six years.
 
In-process research and development (“IPR&D”) originally consisted of seven interrelated projects that will be incorporated into one product and had not yet reached technological feasibility. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets are not amortized as charges to earnings; instead these assets are subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. During the fiscal quarter ended March 31, 2012, we determined that one of the hardware projects would not be completed. We reviewed the original IPR&D valuation and

9


determined an appropriate value for the project to be discontinued. As a result, $0.2 million was included in research and development expense in the second fiscal quarter for that project. None of the remaining projects had been completed as of June 30, 2012.
 
We expensed $0.6 million of acquisition-related costs as selling, general and administrative expenses in our consolidated statements of operations in the fiscal year ended October 1, 2011.
 
Results of operations for the business have been included in our consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.

4.     FAIR VALUES
 
We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations would be based on unobservable inputs to a valuation model and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. As of June 30, 2012 and October 1, 2011, we did not have any assets or liabilities valued based on Level 3 valuations.

Financial assets and liabilities measured at fair value as of June 30, 2012 are summarized below (in thousands):
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Total Fair
Value
 
(Level 1)
 
(Level 2)
 
 
Money market fund deposits (1)
$
16,407

 
$

 
$
16,407

Certificates of deposit (1)

 
14,947

 
14,947

U.S. and international government obligations (2)

 
90,419

 
90,419

Corporate notes and obligations (2)

 
36,605

 
36,605

Foreign currency contracts (3)

 
(132
)
 
(132
)
Mutual funds — Deferred comp and supplemental plan (4)
6,072

 

 
6,072

 ___________________________________________________
(1)          Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.
(2)          Included in short-term investments on the Condensed Consolidated Balance Sheet.
(3)          Includes $649 recorded in prepaid expenses and other assets and $781 recorded in other current liabilities on the Condensed Consolidated Balance Sheet (see Note 5).
(4)          Includes $2,780 recorded in prepaid expenses and other assets and $3,292 recorded in other assets on the Condensed Consolidated Balance Sheet.
 
Financial assets and liabilities measured at fair value as of October 1, 2011 are summarized below (in thousands):
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Total Fair
Value
 
(Level 1)
 
(Level 2)
 
 
Money market fund deposits(1)
$
8,135

 
$

 
$
8,135

Certificates of deposit(2)

 
65,941

 
65,941

U.S. and international government obligations(3)

 
62,079

 
62,079

Corporate notes and obligations(4)

 
48,967

 
48,967

Foreign currency contracts(5)

 
181

 
181

Mutual funds—Deferred comp and supplemental plan(6)
7,830

 

 
7,830


10


 ___________________________________________________
(1)
Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.
(2)
Includes $59,431 recorded in cash and cash equivalents and $6,510 recorded in short-term investments on the Condensed Consolidated Balance Sheet.
(3)
Includes $60,978 recorded in cash and cash equivalents and $1,101 recorded in short-term investments on the Condensed Consolidated Balance Sheet.
(4)
Includes $3,436 recorded in cash and cash equivalents and $45,531 recorded in short-term investments on the Condensed Consolidated Balance Sheet.
(5)
Includes $578 recorded in prepaid expenses and other assets and $397 recorded in other current liabilities on the Condensed Consolidated Balance Sheet.
(6)
Includes $2,844 recorded in prepaid expenses and other assets and $4,986 recorded in other assets on the Condensed Consolidated Balance Sheet.
 
5.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
All derivatives, whether designated in hedging relationships or not, are recorded on the condensed consolidated balance sheet at fair value. We enter into foreign exchange forward contracts to minimize the risks of foreign currency fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments.

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro, the Japanese Yen and the Korean Won. As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.
 
For derivative instruments that are not designated as hedging instruments, gains and losses are recognized in other income (expense).
 
The outstanding notional contract and fair value amounts of hedge contracts, with maximum maturity of two months, are as follows (in thousands):
 
 
U.S. Notional Contract Value
 
U.S. Notional Fair Value
 
June 30, 2012
 
October 1, 2011
 
June 30, 2012
 
October 1, 2011
Euro currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
45,184

 
$
42,488

 
$
45,819

 
$
42,103

Sell

 

 

 

Net
$
45,184

 
$
42,488

 
$
45,819

 
$
42,103

Other foreign currency hedge contracts
 

 
 

 
 

 
 

Purchase
$
2,677

 
$
2,351

 
$
2,689

 
$
2,355

Sell
(37,834
)
 
(16,783
)
 
(38,613
)
 
(16,221
)
Net
$
(35,157
)
 
$
(14,432
)
 
$
(35,924
)
 
$
(13,866
)
 
The fair value of our derivative instruments are included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets; such amounts were not material as of June 30, 2012 and October 1, 2011.
 
The amount of non-designated derivative instruments’ gain (loss) in the Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and July 2, 2011 is as follows (in thousands):

11


 
 
 
Amount of Gain or (Loss) Recognized in
 
 
 
Income on Derivatives
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30, 2012
 
June 30, 2012
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Foreign exchange contracts
 
$
(3,246
)
 
$
(3,657
)
 

 
 
Amount of Gain or (Loss) Recognized in
 
 
Income on Derivatives
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
July 2, 2011
 
July 2, 2011
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Foreign exchange contracts
 
$
751

 
$
1,835

 

6.              SHORT-TERM INVESTMENTS
 
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related income taxes, recorded as a separate component of other comprehensive income (“OCI”) in stockholders’ equity until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains and losses on securities sold are determined based on the specific identification method and are included in other income (expense).

Cash, cash equivalents and short-term investments consist of the following (in thousands):
 
 
June 30, 2012
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
82,580

 
$

 
$

 
$
82,580

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

U.S. Treasury and agency obligations
$
87,999

 
$
414

 
$
(9
)
 
$
88,404

International government obligations
2,012

 
4

 
(1
)
 
2,015

Corporate notes and obligations
36,510

 
110

 
(15
)
 
36,605

Total short-term investments
$
126,521

 
$
528

 
$
(25
)
 
$
127,024

 
 
October 1, 2011
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash and cash equivalents
$
166,931

 
$
131

 
$
(1
)
 
$
167,061

 
 
 
 

 
 

 
 
Short-term investments:
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Certificates of deposit
$
6,500

 
$
10

 
$

 
$
6,510

International government obligations
1,101

 
1

 
(1
)
 
1,101

Corporate notes and obligations
45,282

 
275

 
(26
)
 
45,531

Total short-term investments
$
52,883

 
$
286

 
$
(27
)
 
$
53,142

 
The amortized cost and estimated fair value of available-for-sale investments in debt securities as of June 30, 2012 and

12


October 1, 2011 classified as short-term investments on our condensed consolidated balance sheet were as follows (in thousands):
 
 
June 30, 2012
 
October 1, 2011
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in less than 1 year
$
126,521

 
$
127,024

 
$
46,383

 
$
46,632

Total investments in available-for-sale debt securities
$
126,521

 
$
127,024

 
$
46,383

 
$
46,632

 
During the three and nine months ended June 30, 2012, we received proceeds totaling $16.8 million and $76.9 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively. During the three and nine months ended July 2, 2011, we received proceeds totaling $65.7 million and $103.3 million, respectively, from the sale of available-for-sale securities and realized gross gains of less than $0.1 million and $0.1 million, respectively.
 
At June 30, 2012, gross unrealized losses on our investments with unrealized losses that are not deemed to be other-than-temporarily impaired were $25,000 on corporate notes and obligations of $35.7 million and U.S. treasury and agency obligations of $75.3 million.
 
At June 30, 2012, approximately $144.2 million of our cash, cash equivalents and short-term investments were held outside the U.S. in certain of our foreign operations, $50.3 million of which was denominated in currencies other than the U.S. dollar. In January 2012 we converted $89.8 million of assets formerly denominated in Euro to U.S. dollars and invested those funds in U.S. Treasury securities within a European subsidiary whose functional currency is the U.S. dollar. Accordingly, there is no translation adjustment arising from these U.S. dollar denominated investments.

7.    GOODWILL AND INTANGIBLE ASSETS
 
Goodwill is tested for impairment on an annual basis and between annual tests if events or circumstances indicate that an impairment loss may have occurred, and we write down these assets when impaired. We perform our annual impairment tests during the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.
 
We evaluate long-lived assets and amortizable intangible assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to the undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair value.
 
During the nine months ended June 30, 2012, we noted no indications of impairment or triggering events to cause us to review goodwill for potential impairment. We will conduct our annual goodwill testing during the fourth fiscal quarter.
 
The changes in the carrying amount of goodwill by segment for the period from October 1, 2011 to June 30, 2012 are as follows (in thousands):
 
Commercial
Lasers and
Components
 
Specialty
Lasers and
Systems
 
Total
Balance as of October 1, 2011
$
6,365

 
$
69,589

 
$
75,954

Translation adjustments and other
(2
)
 
(2,201
)
 
(2,203
)
Balance as of June 30, 2012
$
6,363

 
$
67,388

 
$
73,751

 
Components of our amortizable intangible assets are as follows (in thousands):
 

13


 
June 30, 2012
 
October 1, 2011
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Existing technology
$
51,817

 
$
(44,729
)
 
$
7,088

 
$
52,283

 
$
(41,615
)
 
$
10,668

Patents
6,728

 
(6,703
)
 
25

 
7,246

 
(7,220
)
 
26

Customer lists
9,728

 
(5,771
)
 
3,957

 
9,807

 
(5,142
)
 
4,665

Trade name
3,413

 
(2,674
)
 
739

 
3,566

 
(2,504
)
 
1,062

Non-compete agreement
827

 
(787
)
 
40

 
837

 
(784
)
 
53

Production know-how
910

 
(745
)
 
165

 
910

 
(621
)
 
289

In-process research & development
1,062

 

 
1,062

 
1,217

 

 
1,217

Total
$
74,485

 
$
(61,409
)
 
$
13,076

 
$
75,866

 
$
(57,886
)
 
$
17,980

 
Amortization expense for intangible assets for the nine months ended June 30, 2012 and July 2, 2011 was $5.0 million and $6.2 million, respectively, which includes $3.7 million and $4.2 million, respectively, for amortization of existing technology and production know-how.

At June 30, 2012, estimated amortization expense for the remainder of fiscal 2012, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):
 
Estimated
Amortization
Expense
2012 (remainder)
$
1,373

2013
4,899

2014
3,242

2015
1,989

2016
1,368

2017
194

Thereafter
11

Total
$
13,076


8.     BALANCE SHEET DETAILS
 
Inventories consist of the following (in thousands):
 
June 30,
2012
 
October 1,
2011
Purchased parts and assemblies
$
48,009

 
$
44,824

Work-in-process
61,030

 
52,457

Finished goods
51,056

 
55,104

Total inventories
$
160,095

 
$
152,385

 
Prepaid expenses and other assets consist of the following (in thousands):
 
June 30,
2012
 
October 1,
2011
Prepaid and refundable income taxes
$
15,971

 
$
9,193

Other taxes receivable
40,527

 
19,883

Prepaid expenses and other
15,375

 
15,888

Total prepaid expenses and other assets
$
71,873

 
$
44,964

 
Other assets consist of the following (in thousands):

14


 
June 30,
2012
 
October 1,
2011
Assets related to deferred compensation arrangements
$
21,070

 
$
22,737

Deferred tax assets
40,292

 
37,156

Other assets
4,484

 
4,289

Total other assets
$
65,846

 
$
64,182

 
Other current liabilities consist of the following (in thousands):
 
June 30,
2012
 
October 1,
2011
Accrued payroll and benefits
$
27,382

 
$
39,639

Deferred income
16,876

 
14,893

Reserve for warranty
17,364

 
16,704

Accrued expenses and other
12,381

 
12,473

Other taxes payable
32,856

 
11,067

Accrued restructuring charges

 
634

Customer deposits
1,622

 
3,210

Total other current liabilities
$
108,481

 
$
98,620

 
The closure of our St. Louis site was completed in the fourth quarter of fiscal 2009.  The closure of our Finland site was completed in the third quarter of fiscal 2011. These closures resulted in charges primarily for employee termination and other exit related costs associated with a plan approved by management.
 
Restructuring charges for the first nine months of fiscal 2011 were recorded in cost of sales, research and development and selling, general and administrative expenses in our condensed consolidated statements of operations.

The following table presents our current liability as accrued on our balance sheet for restructuring charges.  The table sets forth an analysis of the components of the restructuring charges and payments and other deductions made against the accrual for the first nine months of fiscal 2012 and 2011 (in thousands):
 
 
Severance
Related
 
Facilities-
related
Charges
 
Other
Restructuring
Costs
 
Total
Balance at October 2, 2010
$
912

 
$
17

 
$
1,303

 
$
2,232

Provisions
218

 

 
680

 
898

Payments and other
(808
)
 
(17
)
 
(1,255
)
 
(2,080
)
Balance at July 2, 2011
$
322

 
$

 
$
728

 
$
1,050

 
 
 
 
 
 
 
 
Balance at October 1, 2011
$

 
$

 
$
634

 
$
634

Payments and other

 

 
(634
)
 
(634
)
Balance at June 30, 2012
$

 
$

 
$

 
$


We provide warranties on certain of our product sales and reserves for estimated warranty costs are recorded during the period of sale. The determination of such reserves requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. The weighted average warranty period covered is approximately 15 months. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.
 
Components of the reserve for warranty costs during the first nine months of fiscal 2012 and 2011 were as follows (in thousands):

15


 
Nine Months Ended
 
June 30,
2012
 
July 2,
2011
Beginning balance
$
16,704

 
$
13,499

Additions related to current period sales
22,291

 
20,038

Warranty costs incurred in the current period
(21,454
)
 
(18,425
)
Accruals resulting from acquisitions

 
178

Adjustments to accruals, including foreign exchange
(177
)
 
542

Ending balance
$
17,364

 
$
15,832

 
Other long-term liabilities consist of the following (in thousands):
 
June 30,
2012
 
October 1,
2011
Long-term taxes payable
$
21,430

 
$
27,775

Deferred compensation
21,690

 
22,685

Deferred tax liabilities
633

 
2,194

Deferred income
2,240

 
2,636

Asset retirement obligations
1,969

 
1,878

Other long-term liabilities
5,974

 
5,673

Total other long-term liabilities
$
53,936

 
$
62,841

 
9.     SHORT-TERM BORROWINGS
 
We have several lines of credit which allow us to borrow in the applicable local currency. We have a total of $19.7 million of foreign lines of credit as of June 30, 2012.  At June 30, 2012, we had used $2.1 million of these available foreign lines of credit. These credit facilities were used in Europe and Japan during the third fiscal quarter of 2012.  In addition, our domestic line of credit consists of a $50.0 million unsecured revolving credit account with Union Bank of California. The agreement was finalized on May 30, 2012 and expires on May 31, 2014. The line of credit is subject to covenants related to financial ratios and tangible net worth with which we are currently in compliance.  No amounts have been drawn upon our domestic line of credit as of June 30, 2012.


16


10.  STOCK-BASED COMPENSATION
 
Fair Value of Stock Compensation
 
We recognize compensation expense for all share based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis over the respective requisite service period of the awards.
 
Determining Fair Value
 
The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 30, 2012 and July 2, 2011, respectively, were estimated using the following weighted-average assumptions:
 
 
Employee Stock Purchase Plan
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
Expected life in years
 
0.5

 
0.5

 
0.5

 
0.5
 
Expected volatility
 
43.9
%
 
34.1
%
 
49.7
%
 
31.7
%
 
Risk-free interest rate
 
0.1
%
 
0.1
%
 
0.1
%
 
0.2
%
 
Expected dividends
 

 

 

 

 
Weighted average fair value per share
 
$
12.74

 
$
13.88

 
$
14.20

 
$
11.35

 

    
There were no stock options granted during the three and nine months ended June 30, 2012 and July 2, 2011.
 
Restricted stock awards and restricted stock units are independent of option grants and are typically subject to vesting restrictions—either time-based or performance-based conditions for vesting. Until restricted stock vests, shares (including those issuable upon vesting of the applicable restricted stock unit) are subject to forfeiture if employment terminates prior to the release of restrictions and cannot be transferred.
The service based restricted stock unit awards are generally subject to annual vesting over three years from the date of grant.
The automatic annual grants of restricted stock units for non-employee members of the board of directors vest on February 15 of the calendar year following the grant, which is made following our annual meeting of shareholders.
The market-based performance restricted stock unit award grants are generally either subject to annual vesting over three years from the date of grant or subject to a single vest measurement three years from the date of grant, depending upon achievement of performance measurements based on the performance of the Company's Total Shareholder Returns (as defined in the plan) compared with the performance of the Russell 2000 Index.

We granted market-based performance restricted stock units to officers and certain employees. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of Coherent, Inc. common stock to be issued after the applicable award period. The final number of units awarded for this grant will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from a minimum of no units to a maximum of twice the initial award. The weighted average fair value for these performance units was $71.59 and was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:
 
Risk-free interest rate
0.39
%
Volatility
41.8
%
 
We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period, with no adjustment in future periods based upon the actual shareholder return over the performance period.
 

17


Stock-Based Compensation Expense
 
The following table shows total stock-based compensation expense and related tax benefits included in the condensed consolidated statements of operations for the three and nine months ended June 30, 2012 and July 2, 2011 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
Cost of sales
$
453

 
$
369

 
$
1,263

 
$
957

 
Research and development
407

 
384

 
1,231

 
1,084

 
Selling, general and administrative
3,266

 
2,686

 
9,814

 
7,482

 
Income tax benefit
(1,274
)
 
(1,327
)
 
(3,867
)
 
(2,851
)
 
 
$
2,852

 
$
2,112

 
$
8,441

 
$
6,672

 

During the three and nine months ended June 30, 2012, $0.4 million and $1.4 million was capitalized into inventory for all stock plans, $0.5 million and $1.3 million was amortized to cost of sales and $0.5 million remained in inventory at June 30, 2012. During the three and nine months ended July 2, 2011, $0.4 million and $1.1 million was capitalized into inventory for all stock plans, $0.4 million and $1.0 million was amortized to cost of sales and $0.4 million remained in inventory at July 2, 2011.  Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
 
At June 30, 2012, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock plans but not yet recognized was approximately $18.6 million, net of estimated forfeitures of $2.2 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years and will be adjusted for subsequent changes in estimated forfeitures.

At June 30, 2012, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.5 million, which will be recognized over the six month offering period.
 
The cash flows resulting from excess tax benefits (tax benefits related to the excess of tax deduction resulting from an employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the first nine months of fiscal 2012 and fiscal 2011, we recorded $2.7 million and $4.4 million, respectively, of excess tax benefits as cash flows from financing activities.
 
Stock Options & Awards Activity
 
The following is a summary of option activity for our Stock Plans (in thousands, except per share amounts and weighted average remaining contractual term in years):
 
Number of
Shares
 
Weighted
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic Value
Outstanding at October 1, 2011
917

 
$
27.80

 
 

 
 

Granted

 

 
 

 
 

Exercised
(206
)
 
27.48

 
 

 
 

Forfeitures
(1
)
 
26.16

 
 

 
 

Expirations
(6
)
 
32.10

 
 

 
 

Outstanding at June 30, 2012
704

 
$
27.86

 
3.8

 
$
10,783

Vested and expected to vest at June 30, 2012
701

 
$
27.82

 
3.8

 
$
10,760

Exercisable at June 30, 2012
543

 
$
27.53

 
3.4

 
$
8,463

 
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock at the end of the reporting period.  There were approximately 0.7 million outstanding options that were in-the-money as of June 30, 2012.  The aggregate intrinsic value of options exercised

18


under the Company’s stock plans for the three and nine months ended June 30, 2012 were $0.7 million and $5.4 million, respectively, determined as of the date of option exercise. The aggregate intrinsic value of options exercised under the Company’s stock plans for the three and nine months ended July 2, 2011 were $3.4 million and $16.9 million, respectively, determined as of the date of option exercise.
 
The following table summarizes the activity of our time based and market- performance based restricted stock units for the first nine months of fiscal 2012 (in thousands, except per share amounts):

 
Time Based Restricted Stock Units
 
Market-Based Performance Restricted Stock Units
 
Number of
Shares(1)
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares(2)
 
Weighted
Average
Grant Date
Fair Value
Nonvested stock at October 1, 2011
404

 
$
34.71

 
101

 
$
49.77

Granted
249

 
53.59

 
95

 
63.85

Vested
(204
)
 
32.70

 
(44
)
 
53.18

Forfeited
(8
)
 
49.07

 

 

Nonvested stock at June 30, 2012
441

 
$
47.74

 
152

 
$
57.55


__________________________________________
(1)Service-based restricted stock vested during each fiscal year.
(2)Performance-based awards and units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.



19


11.      COMMITMENTS AND CONTINGENCIES
 
We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

 
12.       ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income (net of tax) at June 30, 2012 is comprised of accumulated translation adjustments of $32.7 million. Accumulated other comprehensive income (net of tax) at October 1, 2011 is comprised of accumulated translation adjustments of $51.2 million.
 

13.  EARNINGS PER SHARE
 
Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock awards and stock purchase plan contracts, using the treasury stock method.
 
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands, except per share data): 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
Weighted average shares outstanding —basic
23,633

 
25,066

 
23,538

 
25,000

 
Dilutive effect of employee stock awards
421

 
521

 
466

 
562

 
Weighted average shares outstanding—diluted
24,054

 
25,587

 
24,004

 
25,562

 
 
 
 
 
 
 
 
 
 
Net income
$
17,208

 
$
19,022

 
$
50,414

 
$
61,858

 
 
 
 
 
 
 
 
 
 
Net income per basic share
$
0.73

 
$
0.76

 
$
2.14

 
$
2.47

 
Net income per diluted share
$
0.72

 
$
0.74

 
$
2.10

 
$
2.42

 
 
A total of 108,501 and 97,048 potentially dilutive securities have been excluded from the dilutive share calculation for the three and nine months ended June 30, 2012, respectively, as their effect was anti-dilutive. A total of zero and 44,755 potentially dilutive securities have been excluded from the dilutive share calculation for the three and nine months ended July 2, 2011, respectively, as their effect was anti-dilutive.
 
 

20


14.  OTHER INCOME (EXPENSE)
 
Other income (expense) is as follows (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
Foreign exchange gain (loss)
$
(835
)
 
$
446

 
$
(533
)
 
$
1

 
Gain (loss) on deferred compensation investments, net
(1,051
)
 
216

 
436

 
4,886

 
Translation adjustment related to dissolution of Finland

 

 

 
6,511

 
Other—net
(32
)
 
(100
)
 
385

 
(69
)
 
Other income (expense), net
$
(1,918
)
 
$
562

 
$
288

 
$
11,329

 

The gain on deferred compensation investments, net for the nine months ended July 2, 2011 included the death benefits from one of the insurance policies, net of its previously recorded cash surrender value, of approximately $1.5 million.

In the second quarter of fiscal 2011, we had substantially completed the liquidation of our Finland operations and recognized in other income the accumulated translation gains for this subsidiary previously recorded in accumulated other comprehensive income (loss) on the condensed consolidated balance sheets.

15.  STOCK REPURCHASES
 
On August 25, 2011, we announced that the Board of Directors had authorized the repurchase of up to $50.0 million of our common stock.  The program is authorized for 12 months from the date of authorization. We purchased $25.0 million of our common stock during fiscal 2011 and at October 1, 2011, $25.0 million of shares remained authorized for repurchase under this stock repurchase program.

During the three and nine months ended June 30, 2012, we repurchased and retired 92,700 and 543,200 shares, respectively, of outstanding common stock at an average price of $46.73 and $45.99 per share, respectively, for a total of $4.3 million and $25.0 million, respectively, excluding expenses. Such repurchases were accounted for as a reduction in additional paid in capital.

At June 30, 2012, no amount remained authorized for repurchase under this stock repurchase program.


16.  INCOME TAXES
 
Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period. Our estimated effective tax rates for the three and nine months ended June 30, 2012 were 29.4% and 30.4%. Our effective tax rate for the three and nine months ended June 30, 2012 were lower than the statutory rate of 35% primarily due to permanent differences related to the benefit of foreign tax credits, the benefit of income subject to foreign tax rates that are lower than U.S. tax rates, the benefit of releasing state tax reserves accrued under ASC 740-10 (formerly FASB Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes") and related interest, the benefit of federal research and development tax credits and the benefit of a domestic production activities deduction. These amounts are partially offset by deemed dividend inclusions under the Subpart F tax rules, state income taxes, limitations on the utilization of certain foreign losses, stock compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

Determining the consolidated provision for income taxes, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.
 
As of June 30, 2012, the total amount of gross unrecognized tax benefits was $26.2 million of which $16.7 million, if

21


recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits, net of certain deferred tax assets, were classified as other long-term liabilities in the condensed consolidated balance sheets.
 
Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of June 30, 2012, the total amount of gross interest and penalties accrued was $1.4 million, which is classified as other long-term liabilities in the condensed consolidated balance sheets.
 
We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 2009 are closed to examination. In our major state jurisdiction and our major foreign jurisdiction, the years prior to 2007 and 2006, respectively, are closed to examination. In December 2011 and January 2012, our three German subsidiaries received notices of tax audits for the fiscal years 2006 through 2010. These audits are currently in process.

Management believes that it has adequately provided for any adjustments that may result from tax examinations. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months and we anticipate a lapse in certain statute of limitations which could result in a release of tax reserves and related interest expense under ASC Subtopic 740 "Income Taxes." Specific positions that may be resolved include issues involving research and development credits, transfer pricing and various other matters. The Company estimates that the net unrecognized tax benefits and related interest at June 30, 2012 could be reduced by approximately $0.5 million to $2.5 million in the next 12 months.

Deferred Income Taxes
 
As of June 30, 2012, our condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $67.4 million, which consists of tax credits carryovers, accruals and reserves, competent authority offset to transfer pricing tax reserves, employee stock-based compensation expenses, and certain other liabilities. Management periodically evaluates the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on our ability to generate sufficient future taxable income in the applicable jurisdictions during periods prior to the expiration of tax statutes to fully utilize these assets.  After evaluating all available evidence, we have determined that it is “more likely than not” that a portion of the deferred tax assets would not be realized and we have a total valuation allowance of $10.4 million as of June 30, 2012.  We intend to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.


17.  SEGMENT INFORMATION
 
We are organized into two reportable operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets.  While both segments work to deliver cost-effective solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that product service and repairs are generally based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics. SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products generally require service to be performed at the customer site by factory-trained field service engineers.
 
We have identified CLC and SLS as operating segments for which discrete financial information is available. Both units have dedicated engineering, manufacturing, product business management and product line management functions. A small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.
 
Our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. As assets are not a measure used to assess the performance of the company by the CODM, asset information is not tracked or compiled by segment

22


and is not available to be reported in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in the results below under Corporate and other in the reconciliation of operating results. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.
 
The following table provides net sales and income (loss) from operations for our operating segments (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
 
Net sales:
 
 
 
 
 
 
 
 
Commercial Lasers and Components
$
55,976

 
$
74,970

 
$
166,096

 
$
208,564

 
Specialty Laser Systems
140,407

 
135,912

 
414,338

 
386,309

 
Total net sales
$
196,383

 
$
210,882

 
$
580,434

 
$
594,873

 
 
 
 
 
 
 
 
 
 
Income (loss) from operations:
 
 
 
 
 
 
 
 
Commercial Lasers and Components
$
2,955

 
$
9,514

 
$
8,125

 
$
26,832

 
Specialty Laser Systems
31,484

 
29,357

 
92,582

 
87,615

 
Corporate and other
(8,117
)
 
(10,281
)
 
(28,735
)
 
(33,879
)
 
Total income from operations
$
26,322

 
$
28,590

 
$
71,972

 
$
80,568

 


Major Customers

We had one major customer during the three months ended June 30, 2012 which contributed 11.4% of revenue and two major customers over 10% of revenue during the nine months ended June 30, 2012. There were no major customers over 10% of revenue for the three and nine months ended July 2, 2011, respectively.

We had one major customer which contributed 10.0% of accounts receivable at June 30, 2012. There were no major customers over 10% of accounts receivable at October 1, 2011.

23



18.  SUBSEQUENT EVENT

On July 23, 2012, we acquired all of the outstanding shares of Midaz Lasers Limited "Midaz" for approximately $3.7 million, excluding transaction fees. Midaz was a technology-based acquisition. We intend to utilize the acquired technology in low cost, compact pulsed solid state lasers.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
COMPANY OVERVIEW
 
BUSINESS BACKGROUND
 
We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture, service and market lasers and related accessories for a diverse group of customers. Since
inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.
 
We are organized into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets. While both segments deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that substantially all product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include materials processing, original equipment manufacturer (“OEM”) components and instrumentation and microelectronics. SLS develops and manufactures configurable, advanced performance products largely serving the microelectronics, scientific research and government programs and OEM components and instrumentation markets. The size and complexity of many of the SLS products require service to be performed at the customer site by factory trained field service engineers.
 
Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to assess performance and make decisions. Income (loss) from operations represents the sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain advanced research and development, management, finance, legal and human resources) and are included in Corporate and other. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

MARKET APPLICATIONS
 
Our products address a broad range of applications that we group into the following markets: Microelectronics, Scientific Research and Government Programs, OEM Components and Instrumentation and Materials Processing.
 
OUR STRATEGY
We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:
Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets. We plan to utilize our expertise to expand into new markets.
Optimize our leadership position in existing markets—There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.
Maintain and develop additional strong collaborative customer and industry relationships—We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us

24


to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers who are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.
Develop and acquire new technologies and market share—We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.
Streamline our manufacturing structure and improve our cost structure—We will focus on optimizing the mix of products that we manufacture internally and externally. We will utilize vertical integration where our internal manufacturing process is considered proprietary and seek to leverage external sources when the capabilities and cost structure are well developed and on a path towards commoditization.
Focus on long-term improvement of adjusted EBITDA, in dollars and as a percentage of net sales—We define adjusted EBITDA as operating income adjusted for depreciation, amortization, stock compensation expenses, major restructuring costs and certain other non-operating income and expense items. Key initiatives to reach our goals for EBITDA improvements include utilization of our Asian manufacturing locations, rationalizing our supply chain and continued leveraging of our infrastructure.

 
APPLICATION OF CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes. See Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for our fiscal year ended October 1, 2011.
 

KEY PERFORMANCE INDICATORS
 
The following is a summary of some of the quantitative performance indicators (as defined below) that may be used to assess our results of operations and financial condition:

25


 
Three Months Ended
 
 
 
 
 
June 30, 2012
 
July 2, 2011
 
Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Bookings
$
218,927

 
$
228,479

 
$
(9,552
)
 
(4.2
)%
Book-to-bill ratio
1.11

 
1.08

 
0.03

 
2.8
 %
Net sales—Commercial Lasers and Components
$
55,976

 
$
74,970

 
$
(18,994
)
 
(25.3
)%
Net sales—Specialty Lasers and Systems
$
140,407

 
$
135,912

 
$
4,495

 
3.3
 %
Gross profit as a percentage of net sales—Commercial Lasers and Components
37.1
%
 
40.4
%
 
(3.3
)%
 
(8.2
)%
Gross profit as a percentage of net sales—
Specialty Lasers and Systems
42.7
%
 
44.4
%
 
(1.7
)%
 
(3.8
)%
Research and development as a percentage of net sales
9.8
%
 
10.3
%
 
(0.5
)%
 
(4.9
)%
Income before income taxes
$
24,385

 
$
29,356

 
$
(4,971
)
 
(16.9
)%
Net cash provided by operating activities
$
10,965

 
$
18,390

 
$
(7,425
)
 
(40.4
)%
Days sales outstanding in receivables
64.8

 
61.2

 
3.6

 
5.9
 %
Third quarter inventory turns
2.9

 
3.2

 
(0.3
)
 
(9.4
)%
Capital spending as a percentage of net sales
5.5
%
 
5.3
%
 
0.2
 %
 
3.8
 %
 
 
Nine Months Ended
 
 
 
 
 
June 30, 2012
 
July 2, 2011
 
Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Bookings
$
603,912

 
$
699,609

 
$
(95,697
)
 
(13.7
)%
Book-to-bill ratio
1.04

 
1.18

 
(0.14
)
 
(11.9
)%
Net sales—Commercial Lasers and Components
$
166,096

 
$
208,564

 
$
(42,468
)
 
(20.4
)%
Net sales—Specialty Lasers and Systems
$
414,338

 
$
386,309

 
$
28,029

 
7.3
 %
Gross profit as a percentage of net sales—Commercial Lasers and Components
37.2
%
 
41.2
%
 
(4.0
)%
 
(9.7
)%
Gross profit as a percentage of net sales—
Specialty Lasers and Systems
42.9
%
 
45.7
%
 
(2.8
)%
 
(6.1
)%
Research and development as a percentage of net sales
10.1
%
 
10.3
%
 
(0.2
)%
 
(1.9
)%
Income before income taxes
$
72,465

 
$
92,413

 
$
(19,948
)
 
(21.6
)%
Net cash provided by operating activities
$
43,711

 
$
54,234

 
$
(10,523
)
 
(19.4
)%
Capital spending as a percentage of net sales
5.3
%
 
4.6
%
 
0.7
 %
 
15.2
 %

Definitions and analysis of these performance indicators are as follows:
 
Bookings and Book-to-Bill Ratio
 
Bookings represent orders expected to be shipped within 12 months and serv